U.S. Economy Shrinks by 1.4%: Recession Fears

Inflation at 40-year high.

QUICK FACTS:
  • The U.S. economy shrank last quarter for the first time since recession struck two years ago after the COVID-19 outbreak, contracting at a 1.4% annual rate, according to a Bureau of Economic Analysis (BEA) report released Thursday.
  • “Real gross domestic product (GDP) decreased at an annual rate of 1.4% in the first quarter of 2022,” the report reads.
  • The new data is stoking fears about a recession amid steady inflationary pressures, Deutsche Bank this week doubling down on its message that “a deep recession will be needed” to dampen inflation, which is at 40-year highs. Inflation climbed 8.5% in the last year, wiping away pay gains for workers and challenging many businesses, which are reporting that prices for materials they buy—such as resin and rubber—have risen between 5% and 30% since last fall.
  • Economists surveyed by The Wall Street Journal estimate that U.S. gross domestic product grew at a 1.0% annual rate in the first three months of the year, down from a 6.9% rate at the end of last year, marking the slowest rate since spring 2020. Those economists also estimate GDP rising 2.6% in the fourth quarter of 2022 from a year earlier, logging in well below 5.5% growth recorded last year.
  • Mortgage rates, for years hovering around 3%, surpassed 5% this month for the first time in over a decade. Chuck Wilson, co-owner of Boston Builders, a custom home builder in Westminster, MD, said demand for new homes has slowed in recent weeks, while most building components—shingles, siding, lumber—have gotten more expensive. “Homebuyers are pulling back because interest rates are going up and prices are through the roof,” said Wilson. “I’m finishing up a house now, but I don’t have any new contracts signed. There is very little good to report.”
  • Diane Swonk, chief economist at Grant Thornton, said, “We’ve got a resilient economy but signs of weakness are starting to show,” adding that the “reality is that rate hikes and higher prices have consequences.”
  • “When the Fed has to raise interest rates as far as they say they’re going to, recession risks are high,” said Mark Zandi, chief economist at Moody’s Analytics. “There’s just no graceful way for the economic plane to land on the tarmac. It might land without crashing, but it’s going to be a scary ride.”
Image from Bureau of Economic Analysis
Image from The Washington Post
BEA’S EXPLANATION FOR THE ECONOMIC CONTRACTION:

“The decrease in real GDP reflected decreases in private inventory investment, exports, federal government spending, and state and local government spending, while imports, which are a subtraction in the calculation of GDP, increased,” explained the Bureau of Economic Analysis.

BACKGROUND:
  • The BEA did caution the GDP estimate released today “is based on source data that are incomplete or subject to further revision by the source agency.” A “second” estimate for the first quarter, based on more complete data, will be released on May 26, 2022.
  • Last year, the U.S. economy had grown by 5.7%.